Rock LaManna01.23.13
New products and new technologies are like bright lights and glittery things to owners. Sometimes we can’t take our eyes off them – even when there might be $100,000 right under our noses. All too often in our line of work, we fail to adhere to the fundamentals of business – like good accounting procedures and cash flow management – and we get caught up in the allure of all things new.
This happens time and time again in small to mid-sized businesses. Run by jack-of-all-trade entrepreneurs, these companies spend much of their time looking for new products and technologies as a way to lead them out of a slump. I can’t blame them for that. There are some extraordinary advancements being made in the label and narrow web industry. Take a look at the self-adhesive laminate from Schreiner ProTech as an example.
As FINAT’s Jules Lejeune points out in a recent article, “The (laminate) delivers significant reductions in both time and cost for manufacturers of electronic devices.” Fantastic. Everyone would love to get to significant reductions in both time and cost.
Yet running out to purchase Schreiner ProTech’s new laminate might not save you nearly as much money as it could if you aren’t taking care of the good financial housekeeping. A perfect example is your accounts receivable. In one analysis we did for a client, we found over $100,000 hiding right under his nose. That would definitely come in handy when you’re calling the fine folks at Schreiner ProTech, no?
Are You Acting Like a Bank?
Here’s the crux of the issue: You need to stop being too nice to your customers with your accounts receivable. The scenario goes like this: You have a number of long-term clients who always pay their bills and consistently order from you. Unfortunately, they can be a little scattered with the timing of those bill payments. Even though you end up getting paid, being stricter about due dates will help you to stop acting like a bank, and provide you with the freedom to access your money.
Let me give you an example. We had a client who fit the description I just provided. His clients never paid on time, and he never said a word about it. He hired my team to find out where he was losing money. The first thing we did was examine his accounts receivable. Due to his “let it slide” attitude, we found that he had made the equivalent of $100,136 in interest-fee loans to his customers.
To calculate that number, we took his accounts receivable ($850,000) and found the number of days clients were past due, on average. We then plugged it into this formula to see how much he loaned out: (30+13)/365*850,000=100,136. Hang on, you say. If he never really “had” the money, how can we say he was, in effect, losing it? He never actually lost the money, but he lost the use of the money. And the ramifications of that are huge.
Don’t Lose the Use of Your Money
As the term implies, “use of money” means you don’t get to use the money. Your client does. With your no-interest loan, your client doesn’t have to run to the bank and get a loan to make a purchase. Instead, they have enough cash on hand to either buy equipment outright, or perhaps pursue a more attractive financing package.
On the other hand, because you’ve made the loan and don’t have access to the cash, you have to go to your lender and ask for some help. The interest rate you’ll be charged will show up directly on the bottom line. This is why the use of money is so critical. You need cash to invest, and you can’t use it if it’s buried in your accounts receivable.
Consider this scenario: A new customer walks in the door and places an order of $3 million worth of label printing. That’s a nice revenue boost, and normally you’d jump at it, but there’s a problem.
Bringing on this amount of business will require extra costs. Because you don’t have use of your money (which you’re lending out to all your good friends – er, customers), you can’t hire the amount of people you need to expand your shifts and buy raw materials.
You also don’t have any guarantees that this client will pay on time. Because you never created mechanisms to ensure your account receivables are current, a late payment by the new client could put you in deep trouble with your lenders.
Before you strap on the brass knuckles, we’d like to provide some civilized, and highly effective, ways to make it advantageous for clients to pay you early. Here’s the smart way to stay current with your currency.
Step #1 – Determine if your Accounts Receivable is in good shape
How do you know what your current situation is really like?
I’d suggest using the Current Ratio. Current ratio measures whether or not your firm has the resources to pay your debts over the next 12 months. It compares your current assets to your current liabilities. It’s an indicator of your liquidity.
What’s a good score? In general, if your current ratio is around 2.3, then you have good short-term financial strength. If you’re below 1, then you’re going to have problems meeting short-term obligations.
Step #2 – Get back on track
If you’ve got a Current Ratio below 1, then you need to adopt some strategies to get that metric back in line. Think about implementing the following:
Provide a discount for early payment. Don’t go negative on a client by jumping on them if they’re past 30. Instead, make it a positive situation and offer them a discount for early payment. Offer a discount of 1% net 15 days or 2% net 10 days. The clients saves money (they’ll love you) and you get paid faster (you’ll love your client – and your cash).
Don’t take new orders from customers who haven’t paid. There’s nothing wrong with bending over backwards for customers, but don’t be afraid to show a little backbone from time to time.
Don’t worry about the client heading elsewhere – most successful printers understand the concept of AR management. The ones that don’t will soon be out of business, which means your client will be coming back to you sooner or later.
Watch your AR like a hawk. Empower your accountant to make AR a top priority. Keep yourself in the loop on where your company is in terms of bill payment. Remember, this is the engine that drives your new investment, so if your AR isn’t in line, your growth strategies will be hampered.
There are other strategies for good AR management – these will give you a starting place. Converting over to this level of awareness will take some integration throughout the company, from your accounting people to your sales force. But this is an effort that can pay huge dividends down the road.
Use of money is a concept that reverberates throughout your company. It influences how much you can invest in a new product, how much additional capacity you can afford, and how effectively you can meet the needs of your customers.
I like to focus on financials because these form the foundation of your business. We tend to isolate this area as a concern only for our financial people, but that’s because we never take the time to understand how the financials trigger our business.
Accounts receivable is a perfect example. Now that you understand the concept, revisit your own systems. Then, when you have everything in line, you can make the call to Schreiner ProTech. They’ll be ready for you, but more importantly, you’ll be ready for them.
Rock LaManna, President and CEO of LaManna Alliance, helps printing owners and CEOs use their company financials to prioritize and choose the proper strategic path. Rock can be reached by email at rock@rocklamanna.com.
This happens time and time again in small to mid-sized businesses. Run by jack-of-all-trade entrepreneurs, these companies spend much of their time looking for new products and technologies as a way to lead them out of a slump. I can’t blame them for that. There are some extraordinary advancements being made in the label and narrow web industry. Take a look at the self-adhesive laminate from Schreiner ProTech as an example.
As FINAT’s Jules Lejeune points out in a recent article, “The (laminate) delivers significant reductions in both time and cost for manufacturers of electronic devices.” Fantastic. Everyone would love to get to significant reductions in both time and cost.
Yet running out to purchase Schreiner ProTech’s new laminate might not save you nearly as much money as it could if you aren’t taking care of the good financial housekeeping. A perfect example is your accounts receivable. In one analysis we did for a client, we found over $100,000 hiding right under his nose. That would definitely come in handy when you’re calling the fine folks at Schreiner ProTech, no?
Are You Acting Like a Bank?
Here’s the crux of the issue: You need to stop being too nice to your customers with your accounts receivable. The scenario goes like this: You have a number of long-term clients who always pay their bills and consistently order from you. Unfortunately, they can be a little scattered with the timing of those bill payments. Even though you end up getting paid, being stricter about due dates will help you to stop acting like a bank, and provide you with the freedom to access your money.
Let me give you an example. We had a client who fit the description I just provided. His clients never paid on time, and he never said a word about it. He hired my team to find out where he was losing money. The first thing we did was examine his accounts receivable. Due to his “let it slide” attitude, we found that he had made the equivalent of $100,136 in interest-fee loans to his customers.
To calculate that number, we took his accounts receivable ($850,000) and found the number of days clients were past due, on average. We then plugged it into this formula to see how much he loaned out: (30+13)/365*850,000=100,136. Hang on, you say. If he never really “had” the money, how can we say he was, in effect, losing it? He never actually lost the money, but he lost the use of the money. And the ramifications of that are huge.
Don’t Lose the Use of Your Money
As the term implies, “use of money” means you don’t get to use the money. Your client does. With your no-interest loan, your client doesn’t have to run to the bank and get a loan to make a purchase. Instead, they have enough cash on hand to either buy equipment outright, or perhaps pursue a more attractive financing package.
On the other hand, because you’ve made the loan and don’t have access to the cash, you have to go to your lender and ask for some help. The interest rate you’ll be charged will show up directly on the bottom line. This is why the use of money is so critical. You need cash to invest, and you can’t use it if it’s buried in your accounts receivable.
Consider this scenario: A new customer walks in the door and places an order of $3 million worth of label printing. That’s a nice revenue boost, and normally you’d jump at it, but there’s a problem.
Bringing on this amount of business will require extra costs. Because you don’t have use of your money (which you’re lending out to all your good friends – er, customers), you can’t hire the amount of people you need to expand your shifts and buy raw materials.
You also don’t have any guarantees that this client will pay on time. Because you never created mechanisms to ensure your account receivables are current, a late payment by the new client could put you in deep trouble with your lenders.
Before you strap on the brass knuckles, we’d like to provide some civilized, and highly effective, ways to make it advantageous for clients to pay you early. Here’s the smart way to stay current with your currency.
Step #1 – Determine if your Accounts Receivable is in good shape
How do you know what your current situation is really like?
I’d suggest using the Current Ratio. Current ratio measures whether or not your firm has the resources to pay your debts over the next 12 months. It compares your current assets to your current liabilities. It’s an indicator of your liquidity.
What’s a good score? In general, if your current ratio is around 2.3, then you have good short-term financial strength. If you’re below 1, then you’re going to have problems meeting short-term obligations.
Step #2 – Get back on track
If you’ve got a Current Ratio below 1, then you need to adopt some strategies to get that metric back in line. Think about implementing the following:
Provide a discount for early payment. Don’t go negative on a client by jumping on them if they’re past 30. Instead, make it a positive situation and offer them a discount for early payment. Offer a discount of 1% net 15 days or 2% net 10 days. The clients saves money (they’ll love you) and you get paid faster (you’ll love your client – and your cash).
Don’t take new orders from customers who haven’t paid. There’s nothing wrong with bending over backwards for customers, but don’t be afraid to show a little backbone from time to time.
Don’t worry about the client heading elsewhere – most successful printers understand the concept of AR management. The ones that don’t will soon be out of business, which means your client will be coming back to you sooner or later.
Watch your AR like a hawk. Empower your accountant to make AR a top priority. Keep yourself in the loop on where your company is in terms of bill payment. Remember, this is the engine that drives your new investment, so if your AR isn’t in line, your growth strategies will be hampered.
There are other strategies for good AR management – these will give you a starting place. Converting over to this level of awareness will take some integration throughout the company, from your accounting people to your sales force. But this is an effort that can pay huge dividends down the road.
Use of money is a concept that reverberates throughout your company. It influences how much you can invest in a new product, how much additional capacity you can afford, and how effectively you can meet the needs of your customers.
I like to focus on financials because these form the foundation of your business. We tend to isolate this area as a concern only for our financial people, but that’s because we never take the time to understand how the financials trigger our business.
Accounts receivable is a perfect example. Now that you understand the concept, revisit your own systems. Then, when you have everything in line, you can make the call to Schreiner ProTech. They’ll be ready for you, but more importantly, you’ll be ready for them.
Rock LaManna, President and CEO of LaManna Alliance, helps printing owners and CEOs use their company financials to prioritize and choose the proper strategic path. Rock can be reached by email at rock@rocklamanna.com.